DELAY THE IRRATIONAL?

Congress could buy time to reach deficit deal

Six months from a potential blunt cut to federal spending and government is continuing to warn, industry is starting to act, and lawmakers are looking for an escape hatch. If Congress does not approve $1.2 trillion in deficit reduction or reverse a law passed last year, the federal government will suffer an across-the-board budget cut of the same amount. And half of that will be targeted at the Pentagon. During a speech to the American Enterprise Institute May 30, Deputy Defense Secretary Ashton Carter says the size and bluntness of the penalty make it «managerially irrational… It makes a managerial mess out of all of the things that we’ve tried so carefully to put on a steady footing, our partners in industry and us.»

In response, aerospace and defense companies are preparing for the possibility that the penalty known as sequestration may actually kick in for 2-3 months, says defense analyst Jim McAleese. He notes that large contractors are «acting like banks in the liquidity crisis of a few years ago» and predicts an entire quarter will be «vaporized,» from a business perspective.

But need they be so worried? Chatter in industry circles predicts that lawmakers may opt to delay the penalty for a few months to allow Congress to negotiate a larger deficit-reduction deal. And the leaders of the House Appropriations Committee aren’t ruling that out. «That’s the $64 million question,» says Chairman Hal Rogers (R-Ky.). «We’ve got so many big items looming, whether or not they’re considered simultaneously is a real question. And the election’s looming and both sides are trying to guess who’s going to win in November.» The committee’s top Democrat, Rep. Norm Dicks (Wash.) agrees. «I hope we can resolve it without having to do that, but that could be an option,» he says.

SERVICES CRUNCH

Defense companies that primarily provide services rather than products will be among the first to be hit by reductions in military spending, Moody’s Investor Services warns in its latest commentary. Beyond the next fiscal year, a decline in troop deployments overseas will lead to lower services outlays, Moody’s says. And as contracts roll over and the Defense Department’s heightened focus on procurement cost control takes hold, margins are likely to shrink. «Operational efficiency will become a more critical determinant of contractor competitiveness,» the May 21 report says. A ramp-up by the State Department, which takes over some of the defense services, mitigates the fall-off, but cutbacks are coming regardless. The report notes, though, pockets of opportunity include service providers of intelligence, surveillance and reconnaissance, as well as computer networking.

APACHE WARRIOR

Do not be surprised if Defense Secretary Leon Panetta secures a $1.4 billion deal to sell India 22 Boeing-made Apache Longbow attack helicopters during his trip there this week, say Center for Strategic & International Studies analysts. And in the Indian capital last week, Mark Kronenberg, vice president of international business development for Boeing Defense, Space and Security, told Aviation Week, «we are very positive on Apache.» This visit will be Panetta’s first trip to India in his capacity as Pentagon chief, and it will be the first such visit since his predecessor, Robert Gates, met with counterparts in New Delhi in January 2010. CSIS analysts also note that the trip could lead to more U.S.-Indian military exercises. «It is an oft-stated fact that India conducts more military exercises with the United States than any other country—now up to 50 annually—and this channel of engagement is likely to grow, adding more possibilities for the two countries to cooperate on a range of operations including antipiracy and humanitarian relief efforts.»

JUST IN TIME

After a long and unusually contentious debate in Congress, President Obama signed into law a bill to extend the Export-Import Bank’s charter and provide $140 billion in lending authority by 2014. The debate this year turned into a tiff between aerospace giants Boeing and Delta Air Lines, with Delta expressing fear that Ex-Im financing of widebody jets undercuts its global competitiveness. And some Republicans and conservative interest groups called for an end to the bank and its corporate welfare. In the end, some of Delta’s concerns were addressed, and Ex-Im Bank Chairman Fred Hoch-berg—and Boeing—could breathe a sigh of relief.

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